Maintenance Period for Refiners

As we move out of winter but not yet into spring, crude prices are stagnant.

Everyone knows that refiners are entering their spring maintenance period where they make repairs, install upgrades and switch over to the summer fuel blend processes. Oil demand goes down, inventories rise and refined product inventories decline. Oil prices remain either flat or down. That is exactly what happened last week.

Crude inventories rose 5 million barrels. Distillate inventories declined -4.4 million and gasoline inventories fell 6.3 million. Those are some large numbers in each category. The sharp decline in refined products kept prices from crashing due to the large build in crude inventories. Refiners try to restart production by the end of April so we have another four weeks at least before crude inventories begin to decline again.

Crude inventories have declined in 35 of the last 49 weeks and have declined more than 100 million barrels since April of last year. Inventories are now 18.4% below year ago levels.

The inventories at Cushing did not decline for the first time in twelve weeks. The 28 million barrels is very low for Cushing and they are probably nearing the threshold where they want to limit outflows in order to maintain their operational capability. They always need some oil in storage in case of an outage somewhere. Last week's 28.2 million reading was the lowest since December 2014.

The U.S. production rose to a new record high with an increase of 12,000 bpd to 10.381 million bpd. That is the highest since the EIA began collecting the data in 1983. Propane and natural gas inventories fell to a new low for the year thanks to the back to back cold fronts that crippled the East Coast. There are plenty of supplies left and we could see nat gas inventories begin to rise again in early April. That is when prices are going to decline even further.

Active rigs broke a three-week string of adding 3 rigs a week with an increase to 6 rigs last week. That was 4 oil rigs, 1 gas rig and 1 misc rig. With 990 active rigs, we are back at a post crash high and nearing the 1,000 rig mark.

The EIA raised demand estimates for 2018 once again. They now expect oil demand to rise 1.5 million bpd to 99.3 million bpd. This is an increase of 90,000 bpd over their prior forecast. Since they update their forecast monthly, traders do not get too excited when it happens.

They raised the forecast for OECD nations by 240,000 bpd due to the current strong demand and lower prices. Europe and Asia are very reactive to the price of oil. When oil is cheap as it is today the demand spikes almost immediately. When prices spike, demand declined sharply, almost immediately.

The non OECD forecast was lowered by -150,000 bpd primarily due to Pakistan where imports fell sharply as LNG imports surged. Pakistan consumes a lot of fuel oil and they are trying to convert to the more economical, easier to transport, LNG. Russian and Middle Eastern demand was also revised lower.

Global supply/demand balance for Q1 is expected to be slightly positive with inventories rising about 100,000 bpd. For Q2 they expect global inventories to decline about 200,000 bpd followed by 600,000 bpd in Q3 and slightly over 500,000 bpd in Q4. That assumes the OPEC/non-OPEC production cuts remain in place. Were this to happen we could see some significantly higher crude prices in Q4.

Crude inventories in OECD nations rose for the first time in 7 months with an 18 million barrel gain to 2,871 million barrels. This is 53 million barrels over the 5-year average.

The EIA said global GDP is expected to rise by 3.9% in 2018 as long as protectionism policies are not enacted by the USA.

The agency said non-OPEC production is expected to rise by 1.78 million bpd compared to 760,000 bpd in 2017. The U.S. is expected to see production rise by 1.5 mmbpd and the vast majority of the global increase.

In February OPEC production was 32.1 mmbpd, non-OPEC production was 58.9 mmbpd, a rise of 810,000 bpd. Declines in Venezuela were dragging OPEC production lower.

The overall compliance rate on the OPEC production cuts rose to 147% in February. How did that happen that compliance was more than 100%? This is due to a drop in production by Venezuela that lowered overall OPEC production. The compliance for non-OPEC cuts was 86% and still proof that cheating is occurring.

The American Petroleum Institute (API) said US petroleum demand in February rose to 20.3 mmbpd, up 1 million bpd from February 2017. This is nearly at the record highs not seen in more than a decade. The API said the increase in petroleum demand is an indication the macroeconomic factors are positive and improving.

There is a scenario in progress that suggests we could see $70-$75 oil by the end of 2018 if the production cuts remain in place. However, those price levels are going to be very tempting for those producers prone to cheating. If we did see $75, I would expect the production cuts would end and doom us to a decline back into the lower $60s as global inventories begin to climb once again.

The U.S. is likely to see a recession in mid to late 2019 and early 2020 and that will reset the supply/demand balance for another couple of years and lower oil prices again.